Ares Capital Corp (ARCC) 2016 Q2 法說會逐字稿

Good afternoon. Welcome to the Ares Capital Corp's second-quarter ended June 30, 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded on Wednesday, August 3, 2016.

Comments made during the course of this conference call and webcast and the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of the words such as anticipates, believes, expects, intends, will, should, may, and similar expressions. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason including those listed in its SEC filings. Ares Capital Corp assumes no obligation to update any forward-looking statements. Please also note that the past performance or market information is not guaranteed of future results.

During this conference call, the Company may discuss core earnings per share or core EPS which is a non-GAAP financial measure as defined by the SEC regulation G. Core EPS is the net per share increase or decrease in stockholders equity resulting from operations less professional fees and other costs related to the proposed acquisitions of American Capital, realized and unrealized gains and losses, any capital gains, incentive fees, attributable to such realized and unrealized gains and losses on any income taxes related to such realized gains and losses.

A reconciliation of core EPS to the net per share increase or decrease in stockholders equity resulting from operations, the most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call by going to the Company's website. The Company believes that the core EPS provides useful information to investors regarding financial performance because it is one of the methods the company uses to measure its financial condition and results of operations.

Certain information discussed in this presentation, including information relating to portfolio companies, was derived from third-party sources and has not been independently verified and accordingly, the company makes no representation or warranty in respect of this information. As a reminder the company's second-quarter, ended June 30, 2016 earnings presentation is available on the Company's website at www.arescapitalcorp.com by clicking on the Q2-16 earnings presentation link on the homepage of the Investor Relations section. Ares Capital Corp's earnings release and 10-Q are also available on the company's website.

I will now turn the conference call over to Mr. Kipp deVeer, Ares Capital Corp's Chief Executive Officer. Please go ahead, Sir.

Thanks Dan. Good afternoon and thanks to everyone for joining us today.

Let me start today's call by mentioning our pending merger with American Capital, which will bring together the two largest business development companies in the industry in a transaction that we believe will generate both immediate and long-term value for all shareholders. We expect the transaction will be immediately accretive to our core earnings per share and we also see long-term earnings benefits that may serve as a catalyst for dividend growth at a ARCC. Pro forma for the transaction, we currently estimate the company will have over $12 billion of assets. We believe this increase in scale will enhance our leadership position in middle market direct lending and give us the ability to originate and hold even larger transactions, which we think can improve the business and shareholder returns over the long term.

As you may know, we filed a registration statement and preliminary joint proxy with the SEC, and during this registration period we are extremely limited in what we can discuss. Once finalized, we and ACAS will embark on a proxy solicitation process to achieve the requisite shareholder approvals for the merger and will be happy to engage in a more detailed dialogue with our shareholders at that time. In the meantime, please understand that we will not be able to answer any questions related to the merger on today's earnings call.

Transitioning to our results, we're pleased with a ARCC's strong second-quarter earnings. We delivered basic and diluted core and GAAP earnings per share of $0.39 and $0.50 respectively, including net realized gains of $0.10 per share. This morning we declared a third-quarter dividend of $0.38 per share, which is consistent with the quarterly dividend we've paid shareholders for the last 16 quarters, beginning with the third quarter of 2012. We also continue to grow net asset value quarter-over-quarter, from $16.50 at March 30 $16.62 at June 30.

Overall we are pleased with how the portfolio and the company as a whole are performing and we're excited to provide updates on some of our more a notable activities and projects. But first I'll provide a few thoughts on the market environment. The leveraged lending market rebounded in the second quarter after a rocky finish to 2015 and a tumultuous start to the year. We continue to see elevated interest in direct lending from our global investor base, however most are focused on private investments and private funds.

From our vantage point, we're having trouble reconciling this strong global demand for direct lending assets and the attractive returns they provide, versus the tepid demand for investing in high quality BDCs holding similar assets. We believe that ARCC trading below book value is an attractive proposition for investors, particularly in a world dominated by negative real interest rates. With this much inconsistency in investor approaches to the asset class, we continue to focus on playing what we consider the long game and we intend to continue to do what we've done since our IPO: create shareholder value and let the rest take care of itself.

The themes on the supply side of the market remain pretty consistent as banks continue to retreat from lending to middle market companies, and our clients seem to value us more and more. ARCC's size and scale has always been a key competitive advantage, as we're able to offer full financing solutions to our borrower and financial sponsored clients. Many of you may have seen our announcement that we're leading a $1 billion unitranche financing to support the take-private of Qlik Technologies. This is a prime example of how we are able to drive selectivity, aggregate high quality assets, and generate consistent and meaningful fee income. The Qlik transaction is expected to close in the third quarter.

We have been busy on a number of interesting opportunities, however, we are forced to be quite selective in today's market. We're finding many new investment opportunities that simply do not make it past our credit filter. Loan volumes were light in the middle market during the second quarter, terms are more competitive, structures are looser and pricing has tightened with a lack of supply of quality deal flow.

And ARCC's new investment activity was light as well, with growth commitments of $540 million. We saw excess of $759 million of commitments as a result of sales, syndications and pay-downs in the second quarter and we experienced a net reduction in our portfolio of about $170 million. With this, we've seen some deleveraging of the company with our net leverage ratio declining to 0.72 times at the end of the second quarter.

Before we move to the detailed discussion of our financial results, I'd like to provide an update on our senior direct lending program. As many of you know, last summer that we announced an exciting partnership with Varagon Capital Partners and AIG as it's strategic investment partner. Over the last year we've been busy building a portfolio of loans to middle market companies, which I'm pleased to announce was sold to the program last week.

The SDLP portfolio is now $926 million of funded assets, comprised of first lien, senior secured loans to 10 borrowers. Initially the program has investment capacity of approximately $2.9 billion, and the program may invest up to $300 million in an individual loan. We're happy to have this program fully operational, and we look forward to its attractive returns and the growth contributing to our future earnings results at ARCC. Now I'd like to turn the call over to Penni, our CFO, to discuss our second-quarter financial results and to provide details on our recent financing activities.

Thanks Kipp.

Our basic and diluted GAAP net income per share for the second quarter of 2016 was $0.50, compared to $0.42 for the first quarter of 2016, and $0.47 for the second quarter of 2015. Our basic and diluted core earnings per share were $0.39 for the second quarter of 2016, as compared to $0.37 for the first quarter of 2016, and $0.37 for the second quarter of 2015.

Our higher GAAP earnings in the second quarter were primarily driven by net gains of $0.16 per share, compared to first quarter net gains of $0.06 per share. Our higher core earnings in the second quarter were primarily driven by lower interest expense following the repayments of the first half of this year of our higher cost convertible notes and a corresponding increase utilization on our lower-cost revolving credit facilities.

As of June 30, 2016 our portfolio totaled $8.9 billion at fair value and we had total assets of $9.2 billion. At June 30 our portfolio totaled $8.9 billion at fair value and we had total assets of $9.2 billion. At June 30, 2016 the weighted average yield on our debt and other income producing securities that amortize costs was 9.8%, and the weighted average yield on total investments unamortized cost was 8.9% as compared to 10.1% and 9.2% respectively at March 31, 2016.

The declines in our portfolio yields were primarily driven by the drop in our yield on our SSLP subordinate certificates, which declined from 11.75% at the end of the first quarter to 10% as of the end of the second quarter. The decline in yield is primarily due to the $1.2 billion of repayments in the SSLP during the second quarter. Over the last year, the SSLP portfolio has declined $3.8 billion from $10 billion at June 30, 2015 to $6.2 billion as of June 30, 2016.

Despite the fact that our yield on our SSLP subordinated certificates has declined over time as anticipated, we have continued to generate core earnings that are in line with or better than the second quarter 2015, the last quarter before the SSLP began to wind down. Additionally, as the yield on our SSLP subordinated certificates declines over time, so to does this risk as our senior notes outstanding ahead of our subordinate certificates are repaid. Therefore we believe we continue to receive a strong risk-adjusted return on our investment in the SSLP and we are content with the status quo.

As Kipp mentioned, the SDLP was launched in July and we and Varagon partnered to complete the initial funding of the SDLP. As part of the initial funding, we sold $474 million of funded first lien senior secured loans to the SDLP, and we provided $194 million of capital through our investment in the subordinated certificates to support the acquisition of the initial funded portfolio by the SDLP. We estimate the initial yield on our SDLP sub search will be at least 13.5% against a weighted average yield on the loans we sold to the SDLP of 7.3%. Over time with more diversification the program, we expect to see the potential for even stronger returns on this investment.

We also continue to generate solid net realized gains from our portfolio. For the second quarter of 2016 our net realized gains on investments totaled $33 million, or $0.11 per share, largely from realizations in North American Partners in Anesthesia and Net Smart technologies. We also had net unrealized gains on investments of $18 million, or $0.06 per share. These gains include the negative impact of $24 million, or $0.07 per share from reversals of net unrealized appreciation related to net realized gains on investments. Stockholders equity at June 30 was $5.2 billion, resulting in net asset value per share of $16.62, up 0.7% compared to a quarter ago.

As of June 30, 2016, we had approximately $4.8 billion in committed debt capital, consisting primarily of $2.5 billion in aggregate principal amount of outstanding term indebtedness and $2.2 billion in committed revolving credit facilities. During the second quarter of 2016 we repaid $230 million of aggregate principal amount of our 5 1/8% convertible notes at their maturity in June.

All term debt maturing in 2016 has now been repaid and as we look forward, our term debt maturities in 2017 total only $163 million. After repaying unsecured term debt in the first half of the year, approximately 52% of our total committed debt capital and 65% of our outstanding debt at quarter end was in fixed rate, unsecured term debt. The recent repayment of the convertible notes helped to further reduce the weighted average stated interest rate on our drawn debt capital to 3.9% at June 30, 2016, down from 4% at March 31, 2016.

In the last year, the weighted average stated interest rate on our drawn debt capital has declined by about 100 basis points, resulting in lower interest expense. As of June 30, 2016, our total debt to equity ratio was 0.74 times, and our debt to equity ratio net of available cash of $102 million was 0.72 times. At June 30, 2016 we had approximately $891 million of undrawn availability primarily under our lower-cost revolving credit facilities, subject to borrowing base leverage and other restrictions.

Finally, as Kipp stated, we declared a regular third-quarter dividend of $0.38 per share, this dividend is payable on September 30 to stockholders of record on September 15, 2016. In addition, we estimate that undistributed taxable income carried forward from 2015 into 2016 was approximately $258 million, or $0.82 per share. We believe that our current dividend level remains well supported by our earnings, but the spillover income does provide additional cushion in that regard.

I'd now I'd like to turn it back to Kipp for some additional comments.

Thanks, Penni.

Let me spend a few minutes discussing credit quality in the portfolio. We continue to see growth in our underlying portfolio companies despite the slow growth macro environment, with LTM EBITDA at our corporate borrowers increasing approximately 7% year-over-year. Non-accruals remain low, at 1.3% of assets at cost, and 0.7% at fair value, which is in line with last quarter.

On last quarter's call, I spoke about improvements at Universal Lubricants, one of our larger investments; it returned to accrual status in the first quarter. I'm pleased to report that we were repaid on over $40 million of our investment in the company at cost during the second quarter as the company's largest division was sold. We now have a smaller loan to the remaining company that continues to accrue interest, the fair value of our investment is well in excess of our current cost basis in the company, and we'll work to achieve further proceeds on the name.

Additionally, post-quarter end, we were fully repaid on our second lien loan, to Primexx Energy, one of our oil and gas investments, which we'd previously marked below par due to the decline in commodity prices and the perception of increased risk in the name. This prepayment came at a premium to par. We believe that our ability to manage through our underperforming investments and to manage our watchlist is a meaningful competitive advantage for ARCC and has helped differentiate us as one of the few BDCs to consistently deliver NAV growth over time.

And before I conclude, let me provide some quick comments on our post-quarter end activity. From July 1 to July 27, we made a new investment commitments totaling $469 million, and sold or exited $752 million during the same period to allow for some further post-quarter end deleveraging. This investment activity includes launching the SDLP and the related asset sales, as Penni discussed earlier. Beyond this, as of July 27, our total investment backlog and pipeline stood at approximately $555 million, and $525 million respectively. These investments are all subject to final approvals and to documentation and we can't assure you that they'll close.

So in closing we are pleased with the performance this quarter. We delivered an increase in book value, meaningful realized gains and continued solid credit performance. We continue to see earnings benefits from our initiative to lower our cost of capital, and we have ample liquidity to continue to invest in what we believe to be the best middle market companies. We are confident that a ARCC is well-positioned today with a stable well color covered dividend and a demonstrated ability to consistently generate realized gains in excess of realized losses. And with the launch of SDLP, we now have a highly strategic, higher-yielding asset on our balance sheet that we believe can grow over time.

Finally, we're excited about the benefits that we believe our announced acquisition of American Capital will provide to our shareholders, we're confident in our ability to execute on the integration and we believe the repositioning of their portfolio will generate earnings accretion, which may catalyze dividend growth in the years to come. That concludes our prepared remarks.

Dan, can you open the lines for questions please?

(Operator Instructions)

John Hecht of Jefferies.

Good morning guys, and congratulations to getting the SDLP up and going and thanks for taking my questions.

And on the SDLP, I know Penni, you did mention some of the improvement yield coming from that portfolio. I'm wondering if this is -- I assume it's a unitranche focused portfolio and can you guys maybe shed some light on what kind of other terms along with yields you're getting, maybe leverage and so forth?

I tell you, it's a pretty similar portfolio, John, to the types of investing that we were doing in the old SSLP program, so obviously everything is first lien. That will range from a traditional lower leverage, maybe four times bought unitranche deal up to something that has higher leverage and you know, look, in the market today, a four to five times leverage, first lien deal generally makes you something between 6% and 8% all in.

Okay. And on the SSLP, I mean at any point in time is possible for you just to make an offer to that through the SDLP and just wrap the assets in that pool or is that not a possible given the structure?

Yes. We would like to. We obviously -- in the wind down of SSLP we continue to be partnered with GE, obviously they've largely exited the capital business and they've certainly exited the sponsored finance business. So we have made every attempt to do that and I'd say that GE is just not focused on it today. We're always hopeful that we can gain their focus and do exactly what you're laying out but we haven't had any luck so far.

All right thanks very much.

Conceptually, too, just to answer your question even more completely, could we use SDLP to refinance and or buy the SSLP portfolio? I think we absolutely could.

Okay that's helpful.

And final question, Kipp, you mentioned that the quality of deals aren't good enough for you guys to get more aggressive. Is it the fundamentals of the business you're referring to, or is it of the terms and the structures of the deals or is it some sort of combination thereof?

Yes, I think it's a little bit of everything. I mean, look, the end of last year was pretty tough times in leverage finance and the beginning of this year had a real slow start, so it's finally picked up a bit. I would tell you that I think we and a couple of our competitors that tend to be first calls for most sponsors and frankly, a lot of middle market advisors, borrowers, et cetera, are still seeing a pretty good deal flow.

But we're also just seeing a lot of things that frankly, because of sector in particular, aren't as interesting. For a whole host of reasons.

And, look, I would tell you, with a lack of activity in the market, terms tend to get worse and documents tend to kind of loosen up and covenants don't look as good. So we've passed on a whole host of transactions over the course of really even the last six months for all of the reasons you cited. Company specific, term specific, pricing specific, and I do think that we get a first look at all of the things that we want to get a first look at based on our origination platform and the relationships that we have and our history, but it's just yielding fewer quality names for us right now.

Great. Thanks very much, guys.

Yes, thanks, John.

Rick Shane, JPMorgan.

Hey, guys. Thanks for taking my question.

Kipp, you made a really interesting point at the beginning of the call, talking about the strong interest in private funds and the disconnect between what we're seeing implicitly in valuations, for the BDCs. Obviously you guys are very sophisticated and when you're having those conversations, what's the feedback you're getting to explain that? And when you presumably highlight to potential investors the ability to buy similar assets at a discount, what's the pushback you get?

Yes. I could give you an extremely long answer to the question but I'll try not to. But I'll try to get to a good answer, which is, I'd say on one side of the discussion, we're seeing the frustrated fixed income investor reposition their portfolios into direct lending because of obviously the interest rate environment and sort of what their alternatives are in core fixed income. And that's everything from high grades to mortgages to anything else that they could potentially buy including liquid loans and high yield and all of that.

And folks have decided that taking a portion of their fixed income portfolios into something that is a liquid to achieve better yields and better risk-adjusted returns is something that they are willing to do. So we're seeing a lot of repositioning on that front from kind of core fixed income.

On the other side of it, we're seeing quite a lot of investors coming from the longer term locked up world of private equity where they may be haven't generated the returns that they were hoping for and think of direct lending as something that is less risky, doesn't have a J-curve, offers yields along the way and it can offer 60%, 70%, 80% of the return that they might be looking for in private equity with just a lot less risk. So I don't think were the only ones experiencing those trends, but our credit business as a whole has about $60 billion of assets these days. We get to take a look at what these investors are hoping to achieve in a wide variety of ways and those are kind of the two big trends.

When I tell them that they should buy ARCC stock the answer usually is, we don't buy stocks. Right? That's what our equity group does. And it's just a little bit of square peg in a round hole sort of discussion.

I think that the reason they don't buy stocks as they frankly don't want to see an asset that prices daily. Right? They don't want to be subject to the market volatility of a public BDC of which there's been quite a lot lately.

And it's odd because there hasn't been a whole heck of a lot of volatility in either our dividend or our NAV over the course of the last three years. But the stock tends to move around a bit and I think that's the reluctance that those investors have to buy BDC stocks.

Got it. Okay. Thank you.

Thanks, Rick.

Doug Mewhirter, SunTrust.

Yes. Good afternoon.

So just two questions about the market. First, more conceptual question, so you described a somewhat slow market where maybe competitors are a little aggressive, which makes you less aggressive, which is a very prudent. But now you have this opportunity, where you actually have a lot more capacity with the pending American Capital merger and Varagon opening up.

What are your -- do have sort of a plan A, B, and C in terms of what the market would look like a year or two from now when you're trying to fill up all this extra capacity? And how are you handicapping those different scenarios now, as you're going into 2017?

Yes. I mean, I think the key for us, first thought is we'll syndicate less so if you take a quick -- we talked about this a little bit, we're certainly not holding a billion-dollar financing at ARCC, we're going to have a very large hold there. But that's a classic deal where you're underwriting a larger deal and instead of holding what we're going to hold, we might hold 150% of what we're going to hold simply because the portfolio concentration thoughts are the same, it's just larger numbers.

I don't think I can forecast what the market will be like in two or three years. I think if I had to guess, it will probably be further along in the credit cycle with more defaults rather than less and I'm hopeful that it will be a better reinvestment environment then perhaps it is now, but that would just be speculating. But that would be my view if you wanted me to speculate.

I think the key for our shareholders is to see that with a larger company that we're investing in the business. Right? So I expect that we'll bring more people on. I expect that we will widen the fairway in terms of the types of investing that we're doing, and that means covering more sponsors. That means be more active in our project finance and potentially our oil and gas business and our venture lending business and, again, looking at other verticals that we can be in.

So, more capital just gives you the ability to do more, obviously, and we'll staff up as needed and will broaden our reach as needed.

Okay. Thanks for that, that's helpful.

My second question is maybe a smaller scale question but still market related. You say you've passed on a bunch of deals as you didn't like the terms relative to the prospects of the companies. Are those deals still getting absorbed by the market? Or are a lot of them just not -- are just falling apart?

Oh, no.

-- other BDC's picking them up or banks or private funds taking them up?

They're generally all getting done by the competition. So that's okay with us. You know?

We're in the business of not creating future credit issues and obviously deals that we've passed on our deals that we think, not necessarily will have problems, but I would think -- yes -- generally it's not banks. More and more the banks have retreated from the middle market lending business that's getting filled by some newer entrance but also some existing players.

The transaction du jour for right now seems to be underwrite a six times levered deal with a nine times total leverage covenant for the life of the deal. So we're not going to do that. But we've seen a couple of people do that in the last eight weeks. That's just an example of something that I don't think we want to be part of.

So the good news we have plenty of folks out there finding quality deal flow for the company and we can pass on things.

Okay. Thanks. Once again very helpful and that's all my questions.

Okay. Thanks, Doug.

Ryan Lynch, KBW.

Good afternoon and first, congratulations on the launch of the SDLP fund. My first question is actually surrounding that.

So you guys kind of quote a yield on that investment of about 13.5%. Is that more of a steady-state yield that you guys expected to generate off of that investment and not including any origination fees, meaning that if that find -- if the SDLP is expected to grow, and you guys will start collecting origination fees on that fund, do you expect that that 13.5% can actually go up and maybe meaningfully?

Yes. I'd have to actually go back and look, and I'm looking at Penni, I would say that the run rate of fees on the early investments probably touch lower than what we'd expect on a go forward basis. Just in that we were converting some of our existing portfolio companies into the structure.

But more than that, look, as you build diversity in these programs, you tend to achieve more efficient cost of capital and I think that's what we're working towards. So with greater diversity I think the returns should improve.

Yes and just with --

Okay.

Sorry, Ryan, with respect to the fees themselves, the initial kind of estimate of the 13.5%, I think that ideal will be at least that on the SDLP [subcerts]. That is the return on those [certs] that is not inclusive of the fees that we will earn. So the 194 -- sorry -- $474 million of loans that we sold into the program, we earned the fees on when we originated them. Future deals that will be funded directly by the SDLP, we will earn those fees outside of the yield on the subcerts so it will be in addition to the 13.5.

Okay. Great.

So now that the SDLP is up and running, how much capital do think is reasonable, do you guys think you guys can reasonably deploy in that fund on a quarterly basis? And is your guys non qualified bucket going to prevent growth in the SDLP in any way in the second half of 2016?

So we don't really have a target for originations. But I think we did $1 billion-ish in the last 12 months so it's a reasonable -- guideline for the future.

Without providing any direct guidance I think that's a reasonable number. I don't think it'll be faster or be slower than it has been over the last 12 months.

Sure.

And yes, the 30% basket right now is obviously of constraint and there are two different answers. There's the with American Capital and without American Capital answer.

I tell you, I think in both circumstances, we are planning for growth along the lines of that $1 billion a year we don't expect the 30% basket to constrain that. We think there's ways to manage that in a whole host of ways.

Okay and then two maybe more technical question. You guys had about $0.02 of additional professional costs for the ACAP deal in the second quarter. Are you guys expecting any additional professional costs in the second half of 2016 regarding the ACAP deal?

Yes we do. I mean, obviously we have the cost of a proxy and the solicitation process depending on the timing getting out of review with the SEC, those costs will come in the according quarter. So, yes, there will be some more costs to come prior to closing, but we think they'll be manageable.

I mean, is it reasonable to kind of use the $0.02 this quarter as kind of a good quarterly run rate until the deal would close?

I don't know. I mean, clearly, the second quarter was a heavy quarter for diligence and costs related to the transaction and getting to signing the deal so we may not have costs quite as high as this quarter, but we still have some costs that are coming through. And part of it will depend on the length of the proxies solicitation process. Obviously we have a large number of shareholders, mailings, et cetera so there will be some costs.

Okay. Thanks. That's all the questions I have.

Thank you.

Terry Ma, Barclays.

Hey, guys.

If we are to assume that the closing of the ACAP deal address into 2017, what kind of leverage do have to offset any earnings pressure from slow wind down of the SSLP? Just given you guys are probably pushing for close to 30% bucket.

Yes. So I'll repeat what we've said every quarter for the last four quarters, which is, we don't expect the wind out of SSLP to have a material downdraft on our earnings. In fact if you look at the last four quarters of earnings, since we went into termination on SSLP, our earnings were flat and or better than they were prior, so our net interest margins increased in all four quarters. We don't see meaningful headwinds as it relates to SSLP.

Your points taken, and I made the point earlier about the constraint on the 30% basket without ACAP, so we're obviously planning on pushing very hard to close American Capital but you should feel confident that there is a backup plan on the 30% basket if we are somehow unsuccessful in getting shareholder approval.

Got it.

And then can you maybe just give us a sense of how much additional room you have to grow the SDLP, assuming you do close ACAP?

You can probably do some math on your own, but I don't think we're going to provide any guidance. I'm not sure exactly what the calculation is on the 30% basket, but it's pretty darn close to 30%, so there's not very much on an as reported basis today. But certainly we've got a pretty large company that experiences pretty substantial repayments, some 30% assets, some not.

It's not something that's particularly keeping us up at night. And I would tell you I think if you spoke to Varagon they are not particularly concerned that we continue to ramp SDLP either so just not -- I don't know -- not particularly front of mind, Terry.

Okay. Got it.

And then just one last question, you mentioned the EBITDA growth, LPM EBITDA growth, in your portfolio companies has been 7% year over year. And what's the revenue growth number with that?

We usually don't disclose it, I'd probably have to dig it out, I'm not sure. My guess is it would be a little bit less but I don't know.

Okay. Got it. That's it for me. Thanks.

Yes.

Arren Cyganovich, DA Davidson.

Thanks. So your backlog and pipeline picked up pretty nicely. I guess I'm trying to weigh the balance comments of your seeing tougher stuff, lots of passing of opportunities with a pretty nice pick up in your investment opportunities. And, also, is the Qlik a portion of your investment in that backlog and pipeline or is that outside of that?

Yes. Qlik is in there.

The backlog.

Qlik is actually in the backlog number.

Right.

But the other commented that I'll make is obviously, we're in a post-GE world doing a whole lot more underwriting then we were doing. So think about that -- think about those two kind of $500 million-ish numbers adding up as not necessarily being what we'll retain.

The way that we describe our investing is anything that we underwrite and then sell comes in as backlog and or pipeline. So that doesn't mean that all of that billing and change going to stick at ARCC some of it will be sold.

Okay. So that makes sense.

That also plays into my next question around the leverage, you're kind of in your target leverage range now. Do you expect additional deleveraging, or kind of maintaining this? And then with respect to the relatively large backlog and pipeline, I suppose you just kind of answered this, but you're going to have some repayments but also selling off a portion of those originations?

Yes. I think we are comfortable with where the leverage is now, so there's no goal of deleveraging obviously. We had a net negative quarter as well as a net negative short period post quarter end. But we're kind of running the business on a net zero basis is how I think about it, recycling capital and obviously improving returns, we think with the existing capital base.

Okay. Thank you.

Thank you.

Hugh Miller, Macquarie research.

Thanks for taking my questions.

Sure, Hugh.

So you gave some great color on what you're seeing in the core business in terms of competition, terms, pricing, et cetera. I was wondering if you could kind of give us a sense of what you're seeing within the VC business that you operate in and how are you seeing opportunities there and terms et cetera?

Sure. I think the venture business is transitioning a bit, and then obviously valuations, as everyone read around the papers, had gotten to be pretty robust. So we have seen that it's more challenging to bring the round C or the round D into a venture backed company today and that's actually created a couple of issues at a couple of our smaller names.

So we're cautious around venture right now, but we've got a pretty experienced team there managing the assets. So they are certainly doing new deals but I think along with a ARCC, they are being pretty selective on new deals there. So I think the venture space is definitely in a transition.

That's good color there. And as I guess I think about your portfolio there, do you tend to do more in the way of lending and kind of later expansionary stage versus early-stage or are you kind of spread throughout the VC area?

Yes. I mean if anything is definitely later stage, I mean our venture lending business is typically shorter duration lending between rounds in a non-dilutive way. It sort of allow some of these early-stage companies to have some cash on hand and improve valuations before they do that next round. It's really sort of a bridge from a round C to a round D kind of a business.

But, no, there's a whole mix of things in there. It's basically technology, but there's also some healthcare and some life science names in there as well. But no change in what they've been doing since they've been here.

Okay. That's helpful. Thank you.

And then I guess, in hitting on the healthcare point, it looks like the pipeline is a little less weighted than what we've seen in prior quarters in terms of the healthcare exposure. Is that kind of how things just kind of fell out, is it by design, is there anything we should kind of read into that in terms of just the competitive landscape within that vertical?

No, I don't think so. I think our backlog and pipeline is just more circumstance and company specific than it is anything else.

We're seeing a lot of activity in the technology and business services space. It's not that there is less activity in healthcare. Maybe just you'll see it in this quarter, but I don't think there's anything to draw from that.

Okay. And then last from me, if you could just give us a sense of the differences in yields you are see between first and second lien at this point.

Sure. It's about where it's been historically, which is call it 400 basis points. So if a regular weight senior deal is kind of L450, L500 and I think the second lien market depending on size is probably 850 to 950.

Great. Thank you.

Sure. Thanks.

Robert Dodd, Raymond James.

Hi, everybody.

Just a couple of follow-ups on the SDLP. On the fee side, is this going to be structured somewhat like the SSLP obviously where you get roughly half the fees in terms of origination fees and you book those up front?

Correct.

Okay. Good.

And then on the target leverage, if you can give us an idea within that -- obviously the notes to subcerts right now just about 3.2 times, on the SSLP it's closer to 4. Obviously there's only 10 assets in the SDLP right now so it wouldn't expect you to be able to get to be fully levered by now.

But is there a target leverage within that and obviously if you can get more leverage within that vehicle, I would expect that 13.5 to ratchet up a little bit. So can you give us any color on that?

Sure. So as a reminder, we don't really consider the capital a leverage facility. This is an arrangement that we have in partnership with Varagon and one of their clients effectively to coinvest in transactions together. But if you just think about the mix of their capital to our capital, I think that the goal over time is to have it just look like the SSLP where it's kind of three parts to one part, generally.

Got it. Thank you.

And then final one if I can, on the Qlik technology syndication, $1 billion, I mean can you give us a ballpark, kind of what's the going rate on the syndication arrangement fee that we can be looking out in the third quarter there? 100 basis points something in that order?

But yes. I mean that's a public transaction of its own, so we're really not going to comment on deal terms there. But we were a leader ranger and obviously earned fees to lead that deal and build the group of which there were a couple top-tier rangers that were named in the press release.

Depending on where you came into that transaction, you earned more and if you came in early versus if you came in late as a participant you earned less. So without any specifics, it worked the way most of these leader leverage transactions work.

Okay. Got it. Thank you.

Thank you.

Ben Herbert, UBS.

Hello Kipp and Penni, good afternoon. Thanks for taking my question.

Just on the SSLP and the drag, I think you have kind of called out about $0.02 a quarter back almost a year ago with the Investor Day. I mean, is that still something -- I mean (inaudible) around the yield differential and the pay downs over the past year has been helpful, but is that still something we should kind of be thinking as a ballpark?

And then relatedly, are there other options you're exploring for refinancing that vehicle?

Sure. I think that math is reasonable. It really hasn't changed since we described what we expected would happen as the repayment in that vehicle were directed back to GE.

But I think the good news is, and I've said this in the past I'll say it again, which is generally these borrowers continue to deleverage and exit the program and while that's happening the program itself becomes less risky. Because we have more capital relative to the capital that's ahead of us in the structure so Penni said this in her prepared remarks. Despite the fact that the return on our subcerts has come down, we actually feel the risk has come down commensurate with that return and we feel pretty happy with where we are today.

And again would we love to exit that program completely? We would. Do we have some ideas continuously on the table for GE? We do. But obviously we need to do that with their consent and that they're our partner. And, as I mentioned, we can't quite seem to get their attention on anything other than status quo for the time being.

So I wish I had something more meaningful to report there but I don't.

And just related to that, I mean that $3 billion you said that was repaid over the past year or so, is that kind of a rough expectation for the next year?

I think it's reasonable. I would tell you that the longer the portfolio companies sit in an inactive SSLP, the more difficult it is for them to achieve their objectives. Many of these companies are growth businesses that need capital, they are wanted to make acquisitions, et cetera. So I think, as time goes on, the inclination is that they exit more quickly.

Once it becomes clear that they're and in an inactive lending program, they tend to want to go out and do something else. The problem is, typically to exit and do a new deal, you have to pay new fees. So it really depends on where that portfolio company is in their life cycle.

If you're just hang around in an LBO, for instance, just trying to achieve cost-cutting measures at particular company XYZ, with the idea that you'll sell the company in the next 18 months, you're probably going to hang around in the program because you don't need any capital. If you're a fast growing buy and build story, and you don't have access to any more debt capacity, you're going to pay the new fees and you're going to exit the program.

So it's a little bit of a mix of those types of situations, but, yes, I think there will be a quicker wind up of that program the longer it stays out.

That's helpful color, Kipp, thanks.

Just one last one on the capital structuring fees. Those, having come down a little bit the last two quarters, from kind of a $25 million-ish a quarter run rate fees in 2015. I mean, is that something, obviously the Qlik transaction hitting this quarter, and then likely greater underwriting size coming on with the probably cast acquisition, is that something we should expect to get back that $25 million-ish or higher run rate? Maybe 17 going forward?

Look, I mean, Q1 and Q2, I think, are good examples of quarters where we weren't particularly busy. We had some syndication activity but there was nothing -- American [seafoods] like or Qlik like in Q1 or Q2 that would generate outside syndication fees. So for me that's a number on the low end, obviously, and that there's not a lot of syndication and that there's not frankly that much activity.

We do think obviously with a larger company, and tweak in our business and that were able to lead syndicate senior deals now in a post-GE world that we will increase the level of syndication fees in the company and that our fees will go back up. But at the end of the day, our fees are going to be driven by our activity levels more than anything else. So a busy quarter leads to more fees and a not busy quarter leads to less fees and I don't know if there's a right level, but I think these are both pretty low fee quarters. Yes.

Great. Thanks a lot, Kipp.

Sure. Thank you.

Christopher Testa, National Securities Corp.

Hey, guys. Thanks for taking my questions.

Most of them have been answered but just with the second liens, the yield by cost has gone up steadily over the past four or five quarters or so, was up again this past quarter with spreads narrowing. I was just wondering if there's anything specific driving that? Was it from Universal Lubricants being placed back on accrual? Just any color there would be appreciated.

I probably -- I hadn't noticed that. I'd have to go back and dig into the numbers a little bit.

In terms of the types of second lien deals that we're doing, nothing's changed. So I don't think qualitatively there's nothing that comes to mind to answer your question. I mean we can dig back into the numbers a little bit and be happy to respond to you off-line if we find anything.

But I don't think there's any -- I know there's nothing unusual going on there in terms of how were underwriting and making new investments. So why don't we go take a look at that and get back to you.

All right, yes, that's good.

And just after the ACAP acquisition, post acquisition, just for the capital structure are you looking to upsize the revolver capacity or do unsecured debt issuances again? Just your thoughts on that.

Sure. So, yes. The idea is, as we mentioned, that we'll increase our current facilities to handle the acquisition. We don't have any capital markets issuance required to get the transaction closed.

I think on a more just a general basis, we'd said that we view the go-forth strategy to be a combination of our existing senior facilities along with longer duration, five, seven year high-grade issuances. So we'll certainly take advantage of that market if it looks attractive. I'm thinking that it's with pretty low rates around the world and in the US, as we benchmarked to a five year or ten year, I think that the base rate is pretty darned low, so there may be an opportunity for us to do something there and certainly we take advantage of it.

But nothing required to close the transaction. We'll be opportunistic as we would just as a ACAP wasn't in the picture standalone company.

Got it, okay.

And I just noticed the pick interest in dividends kind of increased to 5% of interest income, usually it's hovering around 2% to 3%. Was there anything outside that caused that to jump this quarter? Was that from anything being placed back on accrual?

No. It wasn't things coming back onto accrual status.

Okay. Got it.

And just I guess bigger picture, just wondering if you guys could comment on what you see for sponsor activity with M&A for the second half of the year relative to the first. It seems like [LBL] multiples have come down a decent amount. Are you seeing that start to pick up again and drive volume?

I mean, it's busier coming off a pretty low base. And it's August all of a sudden which means it slow.

Someone commented that that billing and backlog and pipeline is a big number, it's not particularly a big number for us, particularly when we think about syndicating things.

So I don't know, I think going into a presidential election there's a lot of uncertainty, there seems to be a lot of uncertainty around the world, private equity multiples have gotten very elevated. But actually, a lot of our sponsor friends have said I'd rather hold some of my existing names longer for fear that I can't redeploy capital well in my funds.

So I'm a little bit wishy-washy. I don't think it's going to be a huge finish to the year. I think it'll kind of continue at the current activity levels, maybe a little bit better but I do look at the election as something that's holding activity back quite a bit.

Okay. That's all for me. Thank you.

Thanks for your questions.

Ladies and gentlemen this concludes our question-and-answer session. I would like to turn the conference back over to Kipp deVeer for any closing remarks.

I don't have any other than to say thanks for attending and for the good questions and we're going to sign off. Thanks.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference will be available for approximately one hour after the end of the call through August 16, 2016 to domestic callers by dialing 877-344-7529 and to international callers by dialing 1-412-317-0088. For all replays please reference the conference number 10088255. An archived replay will also be available on the webcast link located on the homepage of the Investor Relations section of our website. Thank you and have a good day.